For more than sixty years, Social Security has provided retirees with a basic, assured level of income protected against inflation, financial market fluctuations, and the risk of outliving one’s assets. It protects against other risks as well, such as disability or the death of a family wage earner.
When the bill was signed into law on August 14, 1935, President Roosevelt said, “We can never ensure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life. But we have tried to frame a law which will give some measure of protection to the average citizen and to his family against poverty-ridden old age. It is a law that will take care of human needs and at the same time provide for the United States an economic structure of vastly great soundness.” (Epstein, 2002 p. 9)
Under a current proposed plan to privatize Social Security, investing into a personal retirement plan seems like a viable solution to the Social Security crises. Choosing to invest a part of our social security taxes in a personal retirement account would secure your retirement funds because you would be able to have control over your funds, there would be some money for your retirement that was guaranteed and the federal government would not be able to touch the funds to spend it on something else.
Benefits are calculated based on your wage history and you must contribute to get a benefit in most cases. It was designed that way so it would not be perceived as a handout, but rather something people earned by paying in. Current benefits are actually progressive, with the lowest paid wager earners getting a retirement benefit that is a higher percentage of pay than higher paid workers. The benefit percentage declines as wages increase, then flatlines when wages go over the limit (currently $97,500). (ssa.gov)
Social Security payments are made in equal shares paid by the workers and their employers. Currently the rate of tax is 6.2% for social security and 1.45% for Medicare. Your employer matches your contribution dollar for dollar but gets a benefit you do not get. Employers can deduct the taxes as a business expense. If you are self employed and do not have an employer to pay part of your bill, you unfortunately are stuck paying the full bill. Self-employed persons pay the full 15.30 % on all earnings up to $97,500 in 2007. However, self-employed persons have one benefit that employees do not have; they can deduct half of the amount paid into social security and Medicare as though they were employers. (ssa.gov)
Participation in the Social Security program is mandatory with respect to the payment of Social Security taxes. Unless specifically exempt by law, everyone working in the United States is required to pay Social Security taxes on earnings from employment. These earnings are subject to Social Security tax without regard to the citizenship or place of residence of either the employer or the employee. (ssa.gov) Some lucky folks are exempt and do not have to pay these taxes. These lucky folks would include:
State and local government workers who participate in alternative retirement systems;
Career federal employees hired before 1984 who did not choose Social Security Coverage;
Ministers who choose not to be covered;
Election workers who make less then $1000.00 per year;
College students who work at their academic institutions;
Household workers who earn less than $1100.00 annually and
Self- employed workers who have net earnings below $400.00.
Currently social security taxes are taking in more money than is being paid out. The excess money, by federal law, must be invested in obligations, mostly bonds, backed by the federal government. These bonds are essentially an I.O.U. from the federal government to Social Security. When the government starts to cash in the bonds to pay Social Security benefits, it will have to raise the money somewhere else either by increasing taxes or by cutting spending on other government priorities. (ssa.gov) In the 1980’s, surpluses started to build up. The federal government at first used this extra money freely for deficit spending. However, it became politically correct to separate the Social Security surplus from the rest of the budget and the surplus was put in an imaginary “lockbox”. Whether these funds are put in this “lockbox” or are spent has no direct impact on the health of the trust fund. Bonds are set-aside in the trust no matter how the government actually uses the cash. (Epstein, 2002)
The most critical time for the budget will be when baby boomers start to retire and it becomes necessary to start cashing in on the trust fund bonds. Baby Boomers will begin to retire as early as 2010. In the coming decades, the Social Security program will stop taking in more money through payroll taxes than it pays out in benefits. Although surpluses will be sufficient to meet benefit obligations until 2017, assets in the Old-Age, Survivors, and Disability Trust Fund (OASDI) are projected to be depleted by 2041. (Jerit, 2006)
The financial pressure on the Social Security trust fund will rise rapidly. Tax income will fall short in 2017 for the first time. There will be more being paid out than what is coming in. Therefore, instead of collecting surpluses each year, the country will need to start dipping into the trust fund. By the year 2038, the trust fund is expected to be exhausted. Currently eighty seven percent of what is paid out in benefits comes from workers and their employers. By 2030, there will be twice as many older Americans. The number of retirees would jump from 35 million today to around 70 million in 2030. By 2030, there will be only 2.1 workers for each beneficiary compared to the 3.4 workers for each beneficiary today. What will make the burden even worse, these beneficiaries are expected to live longer as well. In 1940, the life expectancy of a 65 year old was 12 years, in 2002, the life expectancy of a 65 year old was 17 years and by 2030, the life expectancy might rise as high as 25 years. (Epstein, 2002)
The president and the congress have all talked about locking up the trust fund surpluses and to use them solely for paying down the debt. All we have gotten is talk about reforming the system. No action. Because of the great retirement package that our lawmakers have, they really have no incentive to reform the social security program. The money that our lawmakers pay into the social security program is minimal. It is the equivalent of pin money to them. We need to take some sort of action now instead of later to reform this system to ensure that there is money to pay our benefits when we retire.
A few things can be done to ensure that there are substantial Social Security benefits for future generations:
· We could raise current social security tax rates from 6.2 % to 7.6 % and raise Medicare taxes from 1.45 % to 3 %.
· We could end the cap on Social Security taxes. Currently you only pay social security taxes on earnings up to $97, 500.00.
· We could allow younger workers to take a percentage of their social security taxes and place them in Personal Retirement Accounts.
Raising the social security taxes would not be a very popular idea. However, it would be one way to ensure that the Social Security Trust Fund has a big enough surplus for future generations of retirees. These retirees would be our current twenty and thirty year olds in the 2030’s.
Raising the social security taxes from 6.2% to 7.6% over a period of twenty years would ensure a larger surplus for the Social Security trust fund. This is not a step that we need to take immediately. We still have a decent sized surplus right now. This step might be taken in about 2018 when about a third of the baby boomers are retired. We would also need to increase the Medicare taxes from 1.45% to 3%. Again, a step not needed to be done immediately and it can be done over a period of time. We will need to do this because of the rising costs of medical benefits that are covered under Medicare. It might not be popular with workers but it might be a necessary step in the future to pay out benefits.
Dropping the cap on Social Security taxes is something that we could institute right away. Currently Social Security and Medicare taxes are only taken out of salaries up to $97, 500.00. (ssa.gov) Those who make more than that amount do not pay any Social Security or Medicare taxes on the amounts over the $97, 500.00. Imagine what the Social Security surplus would be if workers who made over $97, 500.00 paid social security taxes on the entire amount of their salaries. Granted most Americans would not fall into this category but why should middle class citizens have to foot most of the bill. Everyone should have to pay Social Security and Medicare taxes on the entire amount of money they earn each year. This alone might put millions of dollars in the Social Security trust fund.
Many younger workers today can just about make ends meet. They cannot afford to put money away for their retirement. Most live paycheck to paycheck. We will not be able to live on Social Security benefits alone. We will need another form of income for our retirement. This is where Personal Retirement Accounts come in. Younger workers should also be given an option on taking a portion of their social security taxes and investing them in a Personal Retirement Account (PRA). The PRA could be either a special type of 401K or an IRA account. Many oppose this reform plan. They are against privatizing any part of social security. Those that oppose it will state because the social security system is a pay as you go system, people who work today, support those who are retired now. By taking money from social security taxes and placing them in a personal retirement account, you will taking benefit money away from today’s retired persons. (Brock, 2004) They are right. If you were to privatize all of the social security funds, it would definitely take away most of the benefits for the currently retires. It would also affect those that rely on Social Security for disability, survivor/dependant benefits, supplemental (SSI), Medicare and Medicaid. However, by only taking a small percentage of the taxes that a worker pays into Social Security and privatizing only that small percentage would not jeopardize the current retirees.
This option to invest in a Personal Retirement Account would only be good for younger workers who have many years of work ahead of them. A person aged 18 to 25 just entering the work force. This option would not be good for anyone over the age of 40 or those who have been working under 20 years. They would not have enough time to have their investment grow large enough to retire on.
Younger workers should be given the option to invest their social security taxes. Yes, there would be a risk in investing part of your social security taxes in a personal retirement account, but it would be a risk that the taxpayer is able to take if they want to.
The Personal Retirement Account would an account that is like a 401K or IRA account, but there would be stricter restrictions on the account. Some of these restrictions could be:
· Once you decided to take the small percentage of SS taxes and place in a personal retirement account, you would not be able to change back just to social security. You would now have both. It would lower your social security benefits, but you would have an additional account to rely on.
· Unlike a 401k or IRA account, you could not take out any money in this account to pay for a first home, college fund, medical expenses or anything else. This account is only for retirement.
· Unlike a 401k or IRA account, you could not start drawing on this account until you reach the minimum age of retirement, which is 62 years of age or 60 years of age if you are a widow/widower. Currently a 401k or IRA account allows you to start drawing on the account at age 59 ½.
The best part about a Personal Retirement Account is the money is yours. The federal government would not be able to dip into it. Neither would you until you reach the minimum retirement age. This account would also be able to be left in your will to your estate or anyone you wanted to leave it to.
Currently, when you die, if you have a surviving spouse, that spouse would only get the larger of the social security checks. So if when you were alive and your check was $1000.00 per month and your spouses was $600.00 per month, your spouse would lose their benefits but gain yours. If you paid into social security and died say within a year or two after retiring or died before you retired, and you were not married and have no underage dependants, then the government would keep the money.
With a personal retirement account, you would be able to leave the money to your spouse, significant other, children, or anyone you wish. The government would not be able to penalize the survivors by taking away their social security benefits because you left them yours.
Overall, personal retirement accounts would benefit young workers just starting out in the work force. As long as we limit the amount of money that they could put into an personal retirement account, make it voluntary, and have some strict guidelines and restrictions on the accounts usage, there should be no problem in privatization this portion of social security benefits.
Despite general agreement among analysts and policymakers that it is better to reform Social Security today rather than tomorrow, and despite continued promises by politicians (including Presidents Clinton and Bush) and repeated claims of their commitment to reform, so far nothing has happened. One reason is that it is always difficult to focus on long-term problems such as Social Security’s deficit, especially when there are other, more pressing issues to be addressed.
Nevertheless, Social Security faces a long-term deficit that needs to be addressed. If we address it sooner rather than later, we will enjoy greater flexibility in the adjustments we can make and can spread those adjustments over more years and decades than if we wait. Continuing to postpone tackling the problem will just make the changes all the more painful when they can no longer be put off. Reforming the system now is much better than waiting—but only if the reform itself makes sense.
References
Arnold, R. D. 1998. "The Political Feasibility of Social Security Reform." Framing the Social Security Debate: Values, Politics, and Economics, R. D. Arnold, M. J. Graetz, and A. H. Munnell (eds), Washington, D.C.: National Academy of Social Insurance.
Bohn, H. 1997. "Social Security Reform and Financial Markets." Social Security Reform: Links to Saving, Investment and Growth, S. A. Sass and R. K. Triest (eds), Federal Reserve Bank of Boston, Conference Series No. 41.
Brock, R. (2004). Retire on Less Then You Think: The New York Times Guide to Planning Your Financial Future. New York: Times Books
Diamond, Peter A.; Orszag, Peter R (2005) Saving Social Security: A Balanced Approach Washington, D.C Brookings Institution Press.
Epstein, Lita (2002) The Complete Idiots Guide to Social Security Indianapolis, IN Alpha Books
Hiltzik, Michael A. (2005) The Plot Against Social Security: How The Bush Plan is Endangering Our Financial Future, New York, NY Harper Collins Publishers
Jerit, Jennifer "Reform, Rescue, or Run Out of Money? Problem Definition in the Social Security Reform Debate" (2006) Harvard International Journal of Press/Politics; Winter2006, Vol. 11 Issue 1, p9-28, 20p
Social Security Administration website located at http://www.ssa.gov last accessed on August 9, 2007
